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Karatz Trial: Former KB Homes Exec Testifies Against His Old Boss

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LOS ANGELES — A former executive of KB Home testified Tuesday against former chairman and Chief Executive Bruce E. Karatz, who is accused of bilking shareholders out of millions of dollars by backdating stock options.

Prosecutors contend that Karatz, 64, illegally backdated stock-options. A stock option allows an employee to purchase the company's stock at a preset price at a future date. If the shares are trading above that price, the employee can then sell the shares and pocket the profit. The perk is designed to encourage employee performance that contributes to the company's financial success.

Backdating involves issuing stock options retroactively to coincide with low points in the share price, thus boosting payouts. It can be illegal if it is not properly accounted for and disclosed to investors.

Gary Ray, the former head of human resources for KB Home, testified that Karatz was complicit in a 1999 shift in the company's policy for awarding stock options that its compensation committee did not know about. Under the new policy, Karatz picked favorable dates in the weeks surrounding the committee's vote.

Ray said Karatz dismissed his suggestions that they brief the committee on the new stock option scheme.

"He responded, 'No, we don't need to. We've got the authority to do this," Ray recounted in court.

Ray pleaded guilty last year to conspiracy to obstruct justice and agreed to testify for the prosecution.

Karatz has pleaded not guilty to 20 counts, including mail, wire and securities fraud, lying to the company's accountants and making false statements in reports to the Securities and Exchange Commission.

He remains free on bond and could face a lengthy prison sentence if convicted of all charges.

He, Karatz and another executive were forced out in 2006 after Los Angeles-based KB discovered that Karatz had benefited from favorably dated option awards between 1998 and 2005.

Karatz agreed to pay some $7 million in September to settle civil charges of backdating stock options but did not admit any wrongdoing.